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Give step-by-step solution with explanation and final answer: Exercise 8 - Calculating and Comparing Return on Invested Capital (ROIC) Apple v. Blackberry Return on Invested Capital (ROIC) is a profitability ratio that measures how effective the firm is at generating a return for investors who have provided capital (bondholders and stockholders). The ROIC calculation answers three questions: How tax efficient is the firm? How effective are the firm’s operations? How intensively does the firm use capital? Comparing the answers to these questions between firms can help you understand why one firm is more profitable than another and where that profitability is coming from. In the following, Apple’s ROIC is compared to Blackberry’s. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Blackberry is completed below, you have to complete the calculation for Apple by supplying the correct income statement and balance sheet information. As you fill in this information, the components of Apple’s ROIC will be calculated along with some supporting ratios. Use these subcomponents and supporting ratios to compare Apple and Blacberry’s performance. Where does Apple’s advantage come from? This activity demonstrates the calculation of ROIC and the comparison of firm performance, supporting Learning Objective 5-1 and 5-2. Instructions Use the income statement and balance sheet information for Apple to fill in the missing items in the calculation of Apple’s ROIC and supporting ratios. Once filled in correctly, compare Apple’s performance to that of Blackberry. Where does Apple have an advantage? Where does Blackberry have an advantage?Apple, Inc. Blackberry Income Statement YE Sept 2012 YE Mar 2012 Net sales 156,508 18,423 Cost of sales 87,846 11,848 Gross margin 68,662 6,575 Research & development expense 3,381 1,559 Selling, general & admin expense 10,040 2,600 other operating [] 930 Total operating expenses 13,421 5,089 Operating margin 55,241 1,486 Interest & dividend income [2] [2] Interest expense [3] [3 Other Income / Expense 522 21 Total Other income 522 21 Earnings before taxes 55,763 1,507 Provision for taxes 14,030 354 Net income (loss) 21,733 1,153 Apple Inc Microsoft Corporation Balance sheet YE sept 2010 YE Har 30 2012 fe) Cash & cash equivalents 10,746 207 Short-term marketable securities 15352 2,82 Accounts receivable 10,530 [A Components ° ° Finished goods ° 1,027 Inventories 7 120s Other Current Assets 15,508 Total current assets 7,55 7,671 ° Long-tern marketable securities ° 2,722 Fixed Assets: PPEE (net) 15,052 Bt Other assets 12,55 Long tern assets BEE) Total assets 75,065 [ERE a ws accounts payable 21,175 ° Accrued expenses ae ° Deferred revenue ° 2,85 other ses Total current Liabilities 3,502 3,38 ° Long-tern debt ° ° Deferred revenue - non-current ° e Deferred tax lisbilities ° Other non-current 1iabilities 1,012 2) Other long-term Liabilities Total long-term liabilities 22 Long-tern liabilities 1,012 Total lisbilities

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Give step-by-step solution with explanation and final answer: Exercise 8 - Calculating and Comparing Return on Invested Capital (ROIC) Apple v. Blackberry Return on Invested Capital (ROIC) is a profitability ratio that measures how effective the firm is at generating a return for investors who have provided capital (bondholders and stockholders). The ROIC calculation answers three questions: How tax efficient is the firm? How effective are the firm’s operations? How intensively does the firm use capital? Comparing the answers to these questions between firms can help you understand why one firm is more profitable than another and where that profitability is coming from. In the following, Apple’s ROIC is compared to Blackberry’s. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Blackberry is completed below, you have to complete the calculation for Apple by supplying the correct income statement and balance sheet information. As you fill in this information, the components of Apple’s ROIC will be calculated along with some supporting ratios. Use these subcomponents and supporting ratios to compare Apple and Blacberry’s performance. Where does Apple’s advantage come from? This activity demonstrates the calculation of ROIC and the comparison of firm performance, supporting Learning Objective 5-1 and 5-2. Instructions Use the income statement and balance sheet information for Apple to fill in the missing items in the calculation of Apple’s ROIC and supporting ratios. Once filled in correctly, compare Apple’s performance to that of Blackberry. Where does Apple have an advantage? Where does Blackberry have an advantage?Uploaded ImageUploaded ImageApple, Inc. Blackberry Income Statement YE Sept 2012 YE Mar 2012 Net sales 156,508 18,423 Cost of sales 87,846 11,848 Gross margin 68,662 6,575 Research & development expense 3,381 1,559 Selling, general & admin expense 10,040 2,600 other operating [] 930 Total operating expenses 13,421 5,089 Operating margin 55,241 1,486 Interest & dividend income [2] [2] Interest expense [3] [3 Other Income / Expense 522 21 Total Other income 522 21 Earnings before taxes 55,763 1,507 Provision for taxes 14,030 354 Net income (loss) 21,733 1,153 Apple Inc Microsoft Corporation Balance sheet YE sept 2010 YE Har 30 2012 fe) Cash & cash equivalents 10,746 207 Short-term marketable securities 15352 2,82 Accounts receivable 10,530 [A Components ° ° Finished goods ° 1,027 Inventories 7 120s Other Current Assets 15,508 Total current assets 7,55 7,671 ° Long-tern marketable securities ° 2,722 Fixed Assets: PPEE (net) 15,052 Bt Other assets 12,55 Long tern assets BEE) Total assets 75,065 [ERE a ws accounts payable 21,175 ° Accrued expenses ae ° Deferred revenue ° 2,85 other ses Total current Liabilities 3,502 3,38 ° Long-tern debt ° ° Deferred revenue - non-current ° e Deferred tax lisbilities ° Other non-current 1iabilities 1,012 2) Other long-term Liabilities Total long-term liabilities 22 Long-tern liabilities 1,012 Total lisbilities

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Asked by: Rahul kumar
Created at: 2025-09-29 07:41:53

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# Step-by-Step Solution: Calculating and Comparing ROIC for Apple and Blackberry ## **Step 1: Formula for ROIC** **Return on Invested Capital (ROIC):** \[ \text{ROIC} = \frac{\text{Net Operating Profit After Taxes (NOPAT)}}{\text{Invested Capital}} \] ### 1. **NOPAT (Net Operating Profit After Taxes):** \[ \text{NOPAT} = \text{Operating Income} \times (1 - \text{Tax Rate}) \] - Operating Income = Operating Margin from the income statement ### 2. **Invested Capital:** \[ \text{Invested Capital} = \text{Total Assets} - \text{Non-interest-bearing Current Liabilities} - \text{Excess Cash} \] - Common adjustments: - **Non-interest-bearing Current Liabilities:** Accounts Payable, Accrued Expenses, Deferred Revenue - **Excess Cash:** Cash & equivalents and marketable securities that are not needed for operations --- ## **Step 2: Apple’s NOPAT Calculation** ### **Operating Margin (Operating Income) for Apple:** - From income statement: **$55,241 million** ### **Tax Rate for Apple:** \[ \text{Tax Rate} = \frac{\text{Provision for Taxes}}{\text{Earnings before Taxes}} = \frac{14,030}{55,763} \approx 25.2\% \] ### **Apple's NOPAT:** \[ \text{NOPAT} = 55,241 \times (1 - .252) = 55,241 \times .748 = \textbf{41,320} \] --- ## **Step 3: Apple’s Invested Capital Calculation** ### **Total Assets:** - From balance sheet: **$176,064 million** ### **Non-interest-bearing Current Liabilities:** - Accounts Payable: $21,175 million - Accrued Expenses: $11,414 million - Deferred Revenue: $5,953 million - **Total:** $21,175 + $11,414 + $5,953 = **$38,542 million** ### **Excess Cash:** - Cash & cash equivalents: $10,746 million - Short-term marketable securities: $18,383 million - **Total excess cash:** $10,746 + $18,383 = **$29,129 million** ### **Invested Capital Calculation:** \[ \text{Invested Capital} = 176,064 - 38,542 - 29,129 = \textbf{108,393} \] --- ## **Step 4: Apple’s ROIC Calculation** \[ \text{ROIC} = \frac{41,320}{108,393} = .381 \approx \textbf{38.1\%} \] --- ## **Step 5: Blackberry’s ROIC (Reference Calculation)** Let’s use the provided numbers for Blackberry. ### **Operating Margin:** $1,486 million ### **Tax Rate:** $354 / $1,507 = 23.5% ### **NOPAT:** $1,486 × (1 - .235) = $1,136 million #### **Assumed Invested Capital** (since full balance sheet not shown, but let's say it's provided as **$6,000 million** for demonstration): \[ \text{ROIC}_{BB} = \frac{1,136}{6,000} = .189 = \textbf{18.9\%} \] --- ## **Step 6: **Comparison and Analysis** ### **Apple:** - **ROIC:** 38.1% - **Advantage:** Apple is far more effective at generating returns on its invested capital. - **Sources of advantage:** - Higher operating income (much greater scale and margin) - Effective tax management (slightly higher rate, but much more profit) - Efficient capital use (relatively low invested capital for its size) ### **Blackberry:** - **ROIC:** 18.9% - **Notes:** Blackberry's lower profitability is due to: - Smaller operating margin - Less efficient use of capital --- ## **Summary Table** | Company | NOPAT ($M) | Invested Capital ($M) | ROIC | |------------|:----------:|:--------------------:|:-------:| | **Apple** | 41,320 | 108,393 | 38.1% | | **Blackberry** | 1,136 | 6,000* | 18.9% | \*Estimated for illustration. --- ## **Conclusion** - **Apple's advantage** comes from **superior operating performance** (high margins, revenue scale) and **efficient use of capital**. - **Blackberry** lags in both areas. - **Key takeaway:** Apple's high ROIC reflects its operational excellence and capital efficiency. --- **If you have Blackberry's full balance sheet, plug in the actual invested capital for a more precise comparison.**

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